Will AI layoffs hit the dollar?

The dollar is thriving on news that another interest rate cut isn't a foregone conclusion. However, the government shutdown and layoffs caused by the rise of AI are fueling growing concerns about the US labor market. This doesn't bode well for the currency.

The dollar has slowly climbed against the euro in recent weeks, reaching its highest level since the summer. This recovery is largely due to Fed Chairman Jerome Powell. As the head of the US central bank, he stated last week that an interest rate cut this year is far from certain. Given the weakening economy, many traders were already anticipating this. Last month, the financial world was quite shocked by the ADP employment report. The number of jobs had fallen by 32.000 in September. Economists had expected an increase of 50.000 jobs.

Wednesday will be exciting
The October figures will be released next Wednesday. With a forecast of around 20.000 new jobs, the bar is considerably lower than in previous months. But the omens are certainly not favorable. Recently, many companies have announced they are reducing their workforces, as more and more work can be done by artificial intelligence. Amazon, for example, announced the elimination of 14.000 office jobs, while investment bank Goldman Sachs is also overhauling its workforce. While corporate profitability could be boosted, this development is less favorable for the American economy. Unlike human employees, artificial intelligence doesn't pay taxes or shop at the supermarket.

Worrying growth slowdown
If the ADP figures point to a shrinking labor market for the third consecutive month, pressure will increase on Powell and the Federal Reserve to boost the economy through a lower policy rate. This pressure has already become quite intense as a result of the shutdown. The US government has been shut down for over a month. Hundreds of thousands of civil servants are at home without work or pay, as Republicans and Democrats struggle to agree on the budget. According to White House calculations, this will result in an economic loss of approximately $15 billion per week. Because Donald Trump's erratic policies are also creating considerable uncertainty regarding trade, it's no wonder that the OECD recently predicted that economic growth in the United States will slow from 2,8% in 2024 to 1,8% this year.

Thunderous surprise
Powell, however, doesn't have the luxury of focusing solely on economic growth. A central bank's job of keeping inflation under control is just as important. In recent months, US inflation has climbed from 2,3% to 3,0%. The next inflation figure is due on November 13th, but due to the shutdown, the publication of various economic data is sometimes delayed. Even without a sharp economic compass for the Federal Reserve, the most likely scenario is that the interest rate cut will still happen in December and the dollar will resume its slide from earlier this year. Unless, of course, Wednesday's ADP jobs figure delivers a huge surprise.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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